Most beneficiaries are aware Social Security is subject to federal income taxes.
Whether or not you pay federal taxes–and how much–on your benefits is based on your combined income. This is the sum of your gross income, nontaxable interest, and 50% of your Social Security income.
If your combined income is $25,000 or more as an individual or $32,000 or more as a couple, you will be taxed on at least 50% of your Social Security benefit. Individuals making more than $34,000 and couples making more than $44,000 can expect to see 85% of their Social Security benefit taxed.
According to NewRetirement.com, in 2017 retirees’ median household income ranged between $30,635 (age 75 and older) and $62,802 (age 55 to 64). Based on this information, it seems a great deal of retirees–especially younger retirees–are already paying federal income taxes on their benefits.
But depending on where you live, you might not be aware there are plenty of retirees expected to pay state income taxes on their Social Security, too. That’s because only 13 states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
These states vary on the amount they tax. Some of these states exempt at different combined income amounts, exclude retirement income from taxable income if the household meets certain requirements, and some apply state income taxes using the same parameters as federal income taxes.
Vermont is a state that taxes Social Security benefits using the federal formula. In Vermont, if an individual makes over $25,000 ($32,000 for couples), at least 50% of their benefits will be subject to state taxes as well as federal taxes. There are no additional protections or exemptions.
But that may be all about to change, thanks to a recent proposal by Governor Phil Scott.
Scott’s proposal is to eliminate state taxes on benefits over three years for individuals making below $45,000 and couples making below $65,000. It also includes a “phase-out” range between $45,000 and $55,000 allowing for partial state tax relief. This would assuredly be a welcome change for beneficiaries living in one of the toughest states to retire.
But Vermont isn’t the only state considering Social Security tax relief for seniors. Minnesota, another state that taxes Social Security at the federal income tax level, recently considered a proposal to double the income threshold at which Social Security becomes taxable. Connecticut has also considered eliminating state income taxes on Social Security.
With three states looking toward easing tax pressure on seniors in such a short time, we can be hopeful this signifies a larger change in the making: states increasing their focus on seniors’ financial health and creating friendlier places for residents to retire.